When considering stocks, especially at the small cap level, potential investors want to see characteristics that lead them to believe that a company will become more valuable in the future. While there are several different approaches to finding stocks that appear well positioned for growth, we focused today on those trading at a price lower than their perceived value and also have projected EPS growth rates above 25% for the next five years. Interestingly enough, when we searched for small cap stocks in the consumer goods arena, all of the companies that made our cut are related to the automotive industry. If this is a category that interests you, and you prefer investing in stocks that are trading for a bargain, we think you will like the list we developed.
The Price/Sales ratio is a price-multiple valuation metric used to help identify if a firm is cheap by its twelve month trailing sales numbers. In the most basic terms, it lets an investor know how much the investment community is willing to pay for every dollar's worth of sales. A firm with a P/S ratio of one or lower would be viewed as cheap, because investors are paying $1 or less for every dollar's worth of a firm's sales. On the other hand, a firm is generally considered to be expensive when the P/S ratio is above three. To be clear, these are general guidelines used by the investment community, not hard rules. Price/Sales Ratio = Current Stock Price/Revenue (sales) per Share
The forward P/E is a price multiple valuation metric, which is similar to the current P/E ratio, except that it uses the forecast earnings instead. While this number might not be as accurate because it uses "forecast" numbers, it does offer the benefit of illustrating analysts' expectations of a firm. If the market believes that earnings will grow moving forward, then the forward P/E should be lower than the current P/E. Financial Leverage, also known as the Equity Multiplier, illustrates how a firm is financing its assets. The lower the number, the more a firm is financing its assets internally through stockholder equity. The higher this metric is, the more the firm is relying on debt to finance its assets.
EPS growth (earnings per share growth) illustrates the growth of earnings per share over time. The 5-Year Expected EPS Growth Rate is a long term annual growth estimate, where the growth projections are made by analysts, the company or other credible sources.
We first looked for small cap consumer stocks. Next, we then screened for businesses that are trading at a discount (P/S<1)(forward P/E<10). We next screened for businesses that have expected earnings per share growth of more than 25 percent for the next five years(5-year projected EPS Growth Rate>25%).
Do you think these small cap stocks have strong operations? Use this list as a starting point for your own analysis.
1) Modine Manufacturing Company (MOD)
|Forward Price/Earnings Ratio||8.28|
|5-Year Projected Earnings Per Share Growth Rate||36.00%|
Modine Manufacturing Company engages in the development, manufacture, and marketing of heat exchangers and systems for use in on-highway and off-highway original equipment manufacturer (OEM) vehicular applications, and to various building, industrial, and refrigeration markets. It offers power train cooling products, including engine cooling modules, radiators, charge-air-coolers, condensers, oil coolers, fan shrouds, and surge tanks; on-engine cooling products comprising exhaust gas recirculation coolers, engine oil coolers, fuel coolers, charge-air-coolers, and intake air coolers; oil coolers consisting of transmission oil coolers and power steering coolers; fuel coolers; and component assemblies and radiators for special applications.
The company also provides gas-fired, hydronic, electric, and oil-fired unit heaters; indoor and outdoor duct furnaces; infrared units; hydronic products, including commercial fin-tube radiation, cabinet unit heaters, and convectors; roof mounted direct and indirect fired makeup air units; commercial packaged rooftop ventilation units; unit ventilators; single packaged vertical units; geo-thermal heat pumps; precision air conditioning units for data center applications; chillers; ceiling cassettes; and condensing units. Its customers include truck, automobile, bus, specialty vehicle, agricultural, industrial, construction, and heating and cooling OEMs; construction contractors; wholesalers of plumbing and heating equipment; engine manufacturers; industrial manufacturers of material handling equipment, generator sets, and compressors; installers; and end users in various commercial and industrial applications. The company offers its products primarily in North America, Europe, South America, Africa, and the Asia/Pacific. Modine Manufacturing Company also exports its products. The company was founded in 1916 and is headquartered in Racine, Wisconsin.
2) Tenneco Inc. (TEN)
|Forward Price/Earnings Ratio||7.60|
|5-Year Projected Earnings Per Share Growth Rate||25.48%|
Tenneco Inc. designs, manufactures, and sells emission control and ride control products and systems for light, commercial, and specialty vehicle applications worldwide. The company offers emission control systems, such as catalytic converters and diesel oxidation catalysts, to reduce harmful gaseous emissions; diesel particulate filters to eliminate particulate matter emitted from diesel engines; burner systems, which combust fuel and air inside the exhaust system; and hydrocarbon vaporizers and injectors. It also provides lean nitrogen oxide traps, selective catalytic reduction systems, and alternative NOx reduction technologies that reduce nitrogen oxide emissions from diesel power trains; mufflers and resonators to provide noise elimination and acoustic tuning; exhaust manifolds that collect gases from individual cylinders of a vehicle's engine and direct them into a single exhaust pipe; pipes to connect various parts of hot and cold ends of an exhaust system; hydro formed assemblies; hangers and isolators used for system installation and elimination of noise and vibration; and after treatment control units.
In addition, the company offers ride control systems comprising shock absorbers, struts, vibration control components, a suite of roll-control and nearly equal wheel-loading systems, and advanced suspension systems, as well as other ride control products, including load assist products, springs, steering stabilizers, suspension kits, and modular assemblies. The company provides its products under the Monroe, Rancho, Clevite Elastomers, Marzocchi, Axios, Kinetic, Fric-Rot, Walker, Fonos, DynoMax, Thrush, and Lukey brands. It serves original equipment manufacturers, and repair and replacement markets. The company was formerly known as Tenneco Automotive Inc. and changed its name to Tenneco Inc. in 2005. Tenneco Inc. was founded in 1987 and is headquartered in Lake Forest, Illinois.
3) Federal-Mogul Corp. (FDML)
|Forward Price/Earnings Ratio||6.03|
|5-Year Projected Earnings Per Share Growth Rate||52.40%|
Federal-Mogul Corporation supplies powertrain and safety technologies worldwide. The company's Powertrain Energy segment offers powertrain components, such as engine pistons, piston rings, piston pins, cylinder liners, camshafts, valve seats and guides, and ignition products under the Federal-Mogul, AE, Champion, Goetze, Nural, and Daros brand names. Its Powertrain Sealing and Bearings segment provides dynamic seals, bonded piston seals, combustion and exhaust gaskets, static gaskets and seals, rigid heat shields, engine bearings, industrial bearings, bushings and washers, sintered engine and transmission components, and metallic filters, as well as polymer bearings primarily under the Federal-Mogul, Deva, Fel-Pro, FP Diesel, Glyco, Metafram, Metagliss, National, Payen, and Poral brand names.
The company's Vehicle Safety and Protection segment offers brake disc pads, brake linings, brake blocks, element resistant systems protection sleeving products, flexible heat shields, brake system components, chassis products, windshield wipers, fuel pumps, and lighting products under the Federal-Mogul, Abex, Anco, Bentley-Harris, Beral, Champion, Ferodo, Moog, ThermoQuiet, and Wagner brands. Its Global Aftermarket segment provides aftermarket products to distributors, retail parts stores, and mass merchants who distribute these products to professional service providers and do-it-yourself consumers under the Abex, AE, ANCO, Beral, Carter, Champion, Fel-Pro, Ferodo, FP Diesel, Glyco, Goetze, MOOG, National, Necto, Nural, Payen, Sealed Power, ThermoQuiet, and Wagner brand names. The company serves original equipment manufacturers of automotive, as well as light, medium and heavy-duty commercial vehicles; and agricultural, marine, rail, aerospace, off-road, and industrial applications, as well as the aftermarket sector. The company was founded in 1899 and is headquartered in Southfield, Michigan. Federal-Mogul Corporation is a subsidiary of Icahn Enterprises L.P.
4) Titan International Inc. (TWI)
|Industry||Rubber & Plastics|
|Forward Price/Earnings Ratio||7.03|
|5-Year Projected Earnings Per Share Growth Rate||28.00%|
Titan International, Inc. and its subsidiaries manufacture and sell wheels, tires, and assemblies for off-highway vehicles used in the agricultural, earthmoving/construction, and consumer markets in the United States. It offers rims, wheels, and tires for use on various agricultural and forestry equipment, including tractors, combines, skidders, plows, planters, and irrigation equipment. The company also provides rims, wheels, and tires for various off-the-road earthmoving, mining, military, and construction equipment, including skid steers, aerial lifts, cranes, graders and levelers, scrapers, self-propelled shovel loaders, articulated dump trucks, load transporters, haul trucks, and backhoe loaders. In addition, it offers wheels and tires; and assembles brakes, actuators, and components for boat, recreational, and utility trailer markets, as well as provides various products for all-terrain vehicles, turf, and golf car applications. The company sells its products directly to original equipment manufacturers, as well as to the aftermarket through independent distributors, equipment dealers, and its own distribution centers. Titan International, Inc. was founded in 1890 and is based in Quincy, Illinois.
*Company profiles were sourced from Google Finance and Yahoo Finance. Financial data was sourced from Finviz on 09/14/2012.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.